Private equity firms invest in companies that are not listed publicly and work to expand or transform them. Private equity firms raise capital in the form of an investment fund that has a clearly defined structure, distribution waterfall and then invest it into their target companies. Fund investors are known as Limited Partners, and the private equity firm acts as the General Partner in charge of buying, managing, and selling the funds to maximize returns on the fund.
PE firms are often accused of being ruthless and pursuing profits at every cost, but they are armed with vast experience in management that allows them to boost the value of portfolio companies by improving the operations and other functions. They can, for example, guide a new executive team by providing the best practices for financial strategy and corporate strategy and assist in implementing streamlined accounting, IT and procurement systems to reduce costs. They can also find ways to improve efficiency and increase revenue, which is just one method to enhance the value of their investments.
Private equity funds require millions of dollars to invest, and it could take them years to sell a business with a profit. In the end, the business is highly inliquid.
Private equity firms require prior experience in banking or finance. Associate associates at entry-level work mostly on due diligence and financing, while junior and senior associates concentrate on the relationship between the firm and its clients. Compensation for these positions has been on an upward trend in recent years.
